Back to the “Big Four”

For most of my career, and really my adult life, there were the “Big Four” telecom companies—Verizon (VZ), AT&T (T), T-Mobile (TMUS), and Sprint. The industry started to consolidate in 2004. When the iPhone launched exclusively on AT&T in 2007, it thrust the company into front-runner status with Verizon.

T-Mobile and Sprint were left fighting for third and fourth place. Then in 2020, T-Mobile bought Sprint and shrunk the field to three. Now, Elon Musk is looking to join the ranks—potentially creating the “Big Four” yet again.

During SpaceX’s first earnings presentation as a public company, President and COO Gwynne Shotwell formally outlined the goals for Starlink Mobile with the explicit goal to win customers away from the “Big Three.”

On October 8, SpaceX struck a deal to buy nationwide 800 MHz spectrum from Grain Management. And while the deal still needs FCC approval, this is the fourth block of spectrum the company has agreed to buy in the past year. The company is definitely putting its money where its mouth is.

There is a lot to be done before Starlink Mobile is a serious competitor. A consumer launch at the end of next year would be the best-case scenario. But that didn’t stop investors from reacting to the latest spectrum acquisition news. The Big Three lost billions in market value in under a week.

And you know what I’ve been doing—poking around to see if that’s created any buying opportunities.

When a Dividend Cut Comes in Handy

I try to own stocks from each of the 11 S&P 500 sectors. In the communications slice, I lean toward these Big Three because they tend to pay some of the highest yields.

• Verizon pays $0.71 quarterly for an annualized yield of 6.4%

• AT&T pays $0.28 quarterly for an annualized yield of 4.7%

• T-Mobile pays $1.17 quarterly for an annualized yield of 3%

My Essential Income readers and I locked in an 82% total return on AT&T shares last December. We sold our shares for $24.46, and I’ve been waiting for the right time to get back in. T-Mobile’s 3% yield doesn’t interest me, but Verizon has stayed on my radar. So, let’s take a look at Verizon and AT&T.

Reader Donna wrote me last week and asked specifically about Verizon, so let’s start there.

Verizon has seen a recent turnaround in postpaid phone net adds, reporting 184,000 in Q2, its best second quarter in five years. That is an important number to watch when looking at a telecom.

Management forecasts full-year EPS growth of 6-7% year over year. Free cash flow is expected to grow 9-10%. Its current dividend payout ratio using earnings is around 56%. Using free cash flow that number drops to about 54%. That’s not a dividend in danger of being cut.

AT&T’s dividend coverage is even better, which is mostly the result of a 2022 dividend cut. Based on earnings, coverage is around 49% and using free cash flow drops to about 45%. Without that dividend cut, the company would have a lot more problems right now.

It is worth noting that AT&T’s growth is steady but slowing. This is one of the reasons I took my gains off the table last year.

Both stocks would be great additions to your income portfolio right now. I don’t think either will see big share price gains anytime soon, but these are solid companies with solid dividends. If I had to pick one, Verizon would be my choice.

Keep Your Eyes Open

Those dividends are not at risk over the near term. But we can’t count on them as set-it-and-forget-it at this time. We’ve got two things to keep an eye on.

Watching the progress of Starlink Mobile is the #1 priority. The latest version of Starlink runs on about 650 first-gen satellites that have the capacity for texting and light data. To achieve continuous global coverage will require two dozen Starship flights each launching 50 satellites, at a minimum. That’s a lofty goal to hit over the next 6-12 months.

There’s also the question of the ground infrastructure needed. The acquired spectrums are just part of this story. Instead of building cell towers like traditional telecoms, Starlink plans to attach small femtocells (small, cellular base stations) to the dishes of Starlink customers. This would be the main ground network.

The immediate issue is that most of Starlink’s current internet customers are in rural areas. Cities and suburbs are where the cells phones are. These small devices would be good to add capacity to an existing network, but may not really work to establish broad coverage.

Starlink has some kinks to work out. The real competition starts to become a threat once we have more answers here. And when the company starts hinting at the types of plans and pricing it will offer.  

Second, we have to look for early signs of the impact Starlink will have on Verizon and AT&T. AT&T reported Q3 earnings this morning. I’m looking at the post paid adds, if earnings guidance is revised, and how investors react. I’ll do the same when Verizon reports next week.

If you want to hold these companies for their steady dividend payments, the more important thing to watch for is early signs that the dividend could be cut or suspended. Both companies have large share buyback programs on top of their dividend payments. A delay or reduction in those plans will be your signal to start planning an exit.

I’m adding here and there to my Verizon position and happy with my above-average yield from this telecom giant.

For more income, now and in the future,

Kelly Green